SME Loan Financing: The Definitive Guide (2020)

About SME Financing in Singapore

SME financing is the funding of small medium enterprises (SMEs) through small business loans. In Singapore, the economy is driven by small and medium sized enterprises which make up about 99% of all enterprises.

Naturally, SME financing accounts for a major segment of the business financing market, where working capital is disbursed to companies through a variety of SME loan products.

It is often said that cash flow is the lifeblood of a company. If asked, most accomplished business owners will tell you that while revenue and profit margins are important, it is cash flow that can make or break a business. This is why the need for small business financing remains as an evergreen concern for most business owners.

While the need for small business funding has not changed over the years, the access and options that are now available to business owners are vastly different. Besides the traditional banks and financial institutions that still provide the majority of business loans in Singapore, the rise of financial technology (Fintech) is fast making its presence known as an alternative source of business financing.

Within the ranks of fintech start ups are the peer-to-peer lending and crowdfunding platforms that share a common goal of disrupting the lending space. Through the use of advanced technology that make the financing process seamless and much faster, these fintech companies are starting to make waves among the small and medium enterprises in Singapore.

To get started, use our Business Loan Calculator to get an accurate estimate of how much your monthly installments will be for a business loan.

Enterprise Singapore

On the 1st of April 2018, International Enterprise Singapore and SPRING merged to form a single entity called Enterprise Singapore.

Enterprise Singapore was formed to carry on the combined work of both SPRING and International Enterprise Singapore — to be the one agency to champion enterprise growth and development in Singapore.

As an embodiment of the government’s efforts to help enterprises stay nimble and competitive in an era of rapid change and technological advancements, Enterprise Singapore is always committed to helping companies build new capabilities, enhance innovations and internationalise to cover new markets.

Along with that, Enterprise Singapore has also partnered with many participating banks and financial institutions to launch a wide range of SME loan products at very affordable interest rates, where Enterprise Singapore co-shares 50% of loan default risks in the event of a company insolvency. This was done in an effort to create a more robust SME lending culture in Singapore, and to make SME financing more accessible to companies in Singapore.

SPRING Singapore

Back in 2012, SPRING Singapore was launched to function as the one-stop government agency to advocate for enterprise growth and development. SPRING was the abbreviation for the Standards, Productivity, and Innovation Board.

Over the years, it is clear to see that SPRING had played a significant role in helping to nurture the pro-business environment that we have in Singapore today. On top of that, SPRING has also helped to facilitate the overseas expansions of many companies, and helped to make access to working capital SME loans a much easier task for small business owners today.

Back a little further to 1983, International Enterprise Singapore (IE) was an agency that was launched by the government to help local companies with overseas growth, and to encourage international trade in the process.

Fast forward till 2018, SPRING and IE merge to form Enterprise Singapore.

Enterprise Singapore works hard to fill the giant shoes once worn by SPRING, and continues forging ahead to establish more bank and financial institution partnerships. From start-ups to seasoned businesses, Enterprise Singapore aims to provide both financial help and industry expertise to whoever needs it.

Government Assisted Financing Scheme

In 2016, SPRING Singapore (now known as Enterprise Singapore) launched a suite of SME loan financing schemes, fronted by the SME Working Capital Loan and SME Micro Loan programs. Through these schemes, SPRING expected to create upwards of $2 billion in business financing over 3 years.

Under the scheme, Singapore-registered companies may apply for unsecured term loans with the participating banks and financial institutions. SPRING Singapore acts as part-guarantor to the loans, making the business loans more accessible and ensuring that the loan rates are affordable for SMEs.

Due to the relatively small size of operations, SMEs often face difficulty in obtaining loans. Even if they are able to, the approved amounts are often insufficient. SPRING aims to mitigate the problem by co-sharing a significant portion of the default-risk. In this way, the credit risk is floored for the participating lender, allowing them to issue the loan and at an attractive rate.

SPRING hopes that the various enterprise financing schemes will relieve short-term financial pressure, allowing businesses to grow and take advantage of new opportunities. The loan programs are especially important in light of the recent economic slump. Easier access to business financing would provide much needed support for SMEs.

Follow the links below for more details on various SPRING Enterprise SME Schemes:

  • SME Working Capital Loan
  • SME Micro Loan
  • SME Venture Loan
  • SME Equipment and Factory Loan
  • Bridging Loan for Marine and Offshore Engineering Companies
  • Internationalisation Finance Scheme (IFS)
  • Loan Insurance Scheme (LIS)
  • Political Risk Insurance Scheme (PRIS)
  • Trade Credit Insurance Scheme (TCIS)

Other SME Financing Solutions

Other than the small business loan schemes launched by Enterprise SG, there are many other corporate financing facilities that you can go for. Choosing the right financing product for your business is essential.

For instance, you do not want to be getting a short-term loan for a long-term project, or a trade facility when what you need is working capital for daily operations. Getting the wrong type of funding can be disastrous.

Here is a list of other business financing solutions that you can consider:

  1. Invoice Financing
  2. Trade Financing
  3. Business Overdraft Facility

1. Invoice Financing

Also known as Receivables Financing, Invoice Financing is a facility that allows you to sell your unpaid invoices at a discounted rate to a financier for cash upfront.

There are 2 types of invoice factoring – disclosed and undisclosed.

Disclosed factoring involves the financier notifying your customer that they have taken ownership of your invoice, where your customer will be make payment directly to the financier. This is the preferred method of invoice factoring for most financiers as the process is straight forward and carries less risk.

Undisclosed factoring entails the debtor being unaware of the involvement of a third party financier, where the debtor will make payment to a joint account between you and the financier. In order for the lender to remain in the shadows, the joint account will bear your company’s name, but will be under the control of the financier. Interest rates for undisclosed factoring is usually higher than disclosed factoring as the lender bears more risk. As you would have guessed, the process for undisclosed factoring is also a lot slower.

With invoice factoring, the financier buys over your invoice for up to 90% of its value. Your customer will make payment directly to the lender, where the lender charges an interest and returns the remainder to you.

If your business involves extending credit terms to your customers, invoice financing could be an ideal financing facility for you, especially if your customers are big and reputable companies.

During credit assessments, lenders will place a heavier emphasis on the quality of your debtor’s credit profile as it is your debtor that will be the one to be making payment ultimately.

2. Trade Finance

Trade financing is the financing of international and domestic trade cycles through the use of various credit instruments. In Singapore, banks and financial institutions usually only offer import financing products. This is because the risk of export financing can be potentially higher than import financing.

Trade finance in Singapore, in terms of import financing, is essentially a revolving credit line that your company can use to purchase goods for inventory and raw materials for your business.

With a trade credit facility, the financier grants you with a credit line that you can draw down on and utilize to make purchases of raw material and inventory for your business.

When a purchase order is issued by your supplier, the bank or financial institution will make a direct payment to your supplier on your behalf, where you will then have a term of 120 days to repay the bank.

3. Business Overdraft Facility

A business overdraft facility (OD) is an unsecured line of credit that you can draw down on to utilize for expanding cash flow. Unlike the trade import financing facility, the business overdraft facility does not restrict how you can to use the additional funds. As a matter of fact, you can withdraw cash anytime you want and use it in anyway that you want.

A great feature of the overdraft facility is that you only need to pay for what you use. The pay-per-use feature provides you with flexibility to utilize the credit line only when you need to, without the need to pay a retainer fee.

You will only have to pay an interest on the amount that you have drawn down. Similar to the trade financing facility, you will also have a period of 120 days to repay the amount that you have drawn down plus interest.

The overdraft facility for business can be a great solution for short-term cash flow utility, but should never be used as a long-term business financing solution. Interest accrued on an OD line will roll over and compound, which can be very costly over time.

General FAQ

When should I apply for an SME loan?

An irony of the global banking and financing system is that the banks and financial institutions will only lend money to those who have money. The hard truth is that the banks are in the business of making money and managing the risk on their balance sheets.

Therefore, as counter-intuitive as it may seem, the best time to apply for SME loans is when the cash flow of your business is strong. And the worst time to apply for a business loan is when you actually need it.

The problem with most business owners is that they will only start to apply for bank loans when they realize that the company does not have sufficient cash flow, which often leads to a rejection.

Therefore, our advise is always to plan ahead. Apply early and get the working capital while cash flows are strong. If you are unable to lay out any concrete plans for the foreseeable future, it is still a good idea to have some additional funds at your disposal, especially if interest rates are low!

How to qualify for an SME loan?

As the banks and financial institutions have developed and progressed with the continual integration of technology over the years, their systems and processes have also become faster and more efficient through automation.

Therefore, to properly qualify for the SME loans, all you have to do is to prepare your application to systematically meet all conditions and requirements.

Here are a few tips to help you qualify:

  • Annual Revenue: Ensure that the yearly turnover of your company is at least S$150,000.
  • Bank Balance: Maintain at least S$10,000 in your corporate bank account and do not let it fall below that amount.
  • Net Profit: Company to turn a net profit. If not, numbers should show improvement over the last 2 years.
  • Outstanding Liabilities: Reduce your company’s credit exposure as much as possible by paying off outstanding loans and other liabilities.
  • Personal income of Director(s): It is mandatory for company Directors in Singapore to provide personal guarantee for business loans. In order to qualify as a guarantor, a Director must have a yearly income of at least S$30,000.
  • Credit History of Director(s): Maintain a healthy credit score of at least CC. Credit grading in Singapore ranges between AA – HH, with AA being the best score.